A changing tax landscape? - Insights from the announced Government and Opposition tax policies - Minter Ellison
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A changing tax landscape? Insights from the announced Government and Opposition tax policies With a Federal election looming, we reflect on the policies announced by both the Federal Government and Australian Labor Party to consider what the forward tax agenda might look like and how this may impact business. minterellison.com
Contents Overview
Corporate tax 3 Treasurer Josh Frydenberg handed down
Personal tax 4 the 2019 – 2020 Federal budget on 2 April
2019 revealing a clear policy agenda by the
Private Businesses 6
Government. Subsequently, on 4 April 2019,
Global tax 8 the Opposition leader Bill Shorten delivered the
Superannuation 10
Budget-in-reply address which confirmed a series
of Labor’s tax policies.
Conclusion 11
With a Federal election to be called shortly,
Contact us 12
‘Budget week’ defined the policy differences
between both major parties. This report explores
the tax policies announced by both sides as we
head into the next election and how this might
impact business.
MinterEllison: Insights from the announced Government and Opposition tax policies | 2
Corporate tax
Overview Federal Budget by Paul Keating in 1987 to eliminate
double taxation on dividends from
The proposals from both Policy: Extension and expansion of company profits. Currently shareholders
parties draw identifiable the ATO Tax Avoidance Taskforce can use imputation credits to reduce
differences in policy intent. Measure: The Government will provide their overall tax liability. Under this
an additional $1 billion over four years regime a concession exists to allow
The Government is focused on from 2019 - 2020 to the ATO to extend some individuals and superannuation
the increased expansion of the the operation of the Tax Avoidance funds to receive a cash refund from the
ATO Tax Avoidance Taskforce, Taskforce and to expand the Taskforce’s ATO if their imputation credits exceed
reflective of their position to programs and market coverage. This the tax otherwise payable. It has been
ensure compliance within is a significant increase from funding announced, that if elected, Labor will
provided to the Taskforce at its close down the concession created by
the tax system and raise tax inception following the 2016 Budget. the Howard and Costello government,
revenue. At that time, the Government had and return to the arrangement first
previously funded the Taskforce with introduced by Hawke and Keating.
The Opposition, taking a
$679 million over four years. As a result, Endorsed income tax exempt charities
different stance, see the the ATO has reported a collection of and not-for-profit institutions with
need to ensure reform by over $5.6 billion in tax in its first two deductible gift recipient status are
making franking credits no years of operation. The Government proposed to be excluded from this
longer refundable to certain has specifically noted that this measure measure. This proposed measure is to
will allow the Taskforce to expand apply from 1 July 2019.
individuals and superannuation
these activities, including increasing
funds, in a bid to close its scrutiny of specialist tax advisors Policy: Changes to the company
loopholes and aid in the and intermediaries that promote tax income tax rate
delivery of improving the avoidance schemes and strategies. Measure: Labor have confirmed
budget’s bottom line. that they will maintain the legislated
Opposition Policies company tax rate reduction to 25% by
Policy: Proposed changes to 2021-2022 for small and medium sized-
dividend imputation business with aggregated turnover of
Measure: Australia’s dividend up to $50 million.
imputation system was introduced
“
MinterEllison insights
The significant expansion in funding now provides the ATO with the
If the tax office resources to enforce several integrity measures which have been introduced
over the last few years with a clear intent to close the corporate tax gap. It
pays a credit to remains to be seen what the ATO’s approach will be with this additional
someone who pays resource, and whether it will be emboldened, as it now appears other
regulators are to litigate first.
no tax, this is a gift
Whilst the increase in funding from the ATO might well be expected to
receive bipartisan support, it is clear that Labor’s proposal for removal of
refundable franking credits will not receive support from the Coalition. It
Budget-in-reply would appear that the proposed removal would have a significant adverse
“
address impact on those superannuation funds whose investment base comprises
primarily of Australian shares, whilst those whose investment base are more
diverse among asset classes may not have any material impact.
MinterEllison: Insights from the announced Government and Opposition tax policies | 3
Personal tax
Overview
Both the Government and Opposition propose to cut taxes for middle income earners.
This commitment is expected to be well received as it offers immediate tax relief, regardless of
who wins the next election, and may be effective as soon as Australians lodge their next tax return.
However the Opposition has outlined further tax reform with respect to key tax items that affect
individuals, including negative gearing and reduction of the CGT discount.
Federal Budget The LMITO will be available via assessment after individuals
lodge their tax returns for the income years ending 30 June
Policy: Personal income tax cuts: Personal Income Tax Plan 2019 to 30 June 2022, at which point the LMITO will be
Measure: The Government announced that it will extend replaced by the changes discussed at Step 2 below.
the Personal Income Tax Plan (PITP) relief as follows.
Step 2:
Step 1: Bracket creep relief for middle income earners
Introduction of the Low and Middle Income Tax Offset
The following changes are proposed to Step 2 of the PITP:
The Low and Middle Income Tax Offset (LMITO) was
introduced as a non-refundable tax offset available for the 1. From 1 July 2022, the 19% personal income tax bracket will
income years ending 30 June 2019 to 30 June 2022. The apply to taxable income between $18,200 and $45,000,
offset depends on the amount of taxable income earned by instead of $18,200 and $41,000, as currently legislated; and
an individual taxpayer in a given income year. 2. The new Low Income Tax Offset (LITO) will be increased
The Government will provide for a further reduction in tax from $645 to $700. The increase will now be withdrawn
provided through the LMITO by increasing the available at a rate of 5 cents per dollar between taxable incomes
offset so that: of $37,500 and $45,000, instead of at 6.5 cents per dollar
between taxable incomes of $37,000 and $41,000 as
• for taxable income of $37,000 or less, an LMITO of $255 currently legislated under the PITP. The LITO will then be
will be available; withdrawn at a rate of 1.5 cents per dollar between taxable
• between taxable incomes of $37,000 and $48,000, the incomes of $45,000 to $66,667.
LMITO will increase at a rate of 7.5 cents per dollar up to Step 3:
the maximum offset of $1,080; Simpler personal income tax system
• between taxable incomes of $48,000 and $90,000, a The Government now proposes to go one step further than
maximum offset of $1,080 will be available; and the original PITP by lowering the existing 32.5% rate to 30%.
As a result, from 1 July 2024, a tax bracket of 30% will apply
• for taxable incomes of $90,000 to $126,000, the offset will to taxable income between $41,001 and $200,000. The top
phase out at a rate of 3 cents per dollar. marginal tax rate of 45% (unchanged from the current top
marginal tax rate) will apply to taxable income exceeding
$200,000.
“ Providing
immediate relief
to address the
cost of living
“
pressures
Federal Budget
MinterEllison: Insights from the announced Government and Opposition tax policies | 4
“ We cannot have property
investors playing with loaded
dice against our young people,
“
Generation Y and the Millennials
Budget-in-reply address
Policy: Increase to the Medicare levy for investment held primarily for the purpose of deriving rent).
low-income thresholds Eligible Build to Rent investments will pay a 15% tax rate.
Measure: The Government proposes to increase the Policy: Change to marginal tax rates for individuals
Medicare levy thresholds for singles, families and pensioners
Measure: With the current top marginal tax rate at 47%
to account for recent movements in the Consumer Price
(inclusive of the Medicare levy), Labor proposes to lift the top
Index.
marginal rate of tax to 49%, an increase of 2%, similar to the
Broadly the thresholds will be increased as follows: Budget Repair Levy that ceased to apply from 1 July 2017.
Labor proposed in their Budget reply that they would be
Singles: From $21,980 to $22,398
offering greater personal tax cuts in a bid to flatten tax rates.
Families: From $37,089 to $37,794
Policy: Deductibility of managing tax affairs
Single seniors and pensioners: $34,758 to $35,418 Measure: Labor has proposed a $3,000 limit on the amount
that individuals are able to deduct from their assessable
Opposition Policies income in relation to the management of their tax affairs.
Proposed changes to negative gearing
Labor has confirmed that, if elected, they will proceed with
the plan to limit negative gearing to newly constructed MinterEllison insights
residential properties.
Labor’s proposed changes to reduce the CGT discount
All investments made before 1 January 2020 will be and to quarantine losses made through negative
protected by grandfathering arrangements. gearing will have a significant impact on investments
in the property market, resulting in a potential
Labor’s policy in respect of negative gearing suggests that
reduction in investor activity leading to downward
losses from new investments other than new residential
pressure on house prices and a reduction in the
properties will not be able to be applied against salary and
practice of margin lending. Both changes apply after 1
wage income. Deductions against investment income, will
January 2020 with investments made before that time
be able to be carried forward in order to offset any gain from
being protected by grandfather arrangements. Post 1
the disposal of the investment that may occur at a future
January 2020, the proposed amendments to negative
date.
gearing will only apply to investments in existing
This proposal would take effect from 1 January 2020. property. To encourage housing construction, investors
in new-builds will still enjoy the concession.
Policy: Proposed changes to the CGT discount
Individuals seeking to utilise negative gearing and
Measure: Labor has proposed to reduce the general CGT
capital tax concessions would be encouraged to
discount for individuals and trusts from 50% to 25% for assets
make their investments before 1 January 2020. Post
acquired from 1 January 2020. The CGT discount is currently
1 January 2020, property investors would need to
available for investments held for more than 12 months on
reconsider their investment strategy and whether they
capital account. The intention of Labor is to grandfather
would benefit from investing in newly constructed
existing investments. The proposed change to the CGT
residential properties over existing properties. As the
discount is not intended to apply to superannuation funds
policy change on the CGT discount does not affect
and small business assets.
investments made by superannuation funds (who
Policy: ‘Build to Rent’ will continue to receive their discount at 33%), we
Measure: Labor has announced that it will reform the anticipate investments from superannuation funds in
tax treatment for ‘Build to Rent’. ‘Build to Rent’ housing is property to grow to obtain the full benefit of the CGT
proposed to be included within a Managed Investment Trust, discount.
where they meet requirements that are currently in place
for commercial property assets (ie. where they are a passive
MinterEllison: Insights from the announced Government and Opposition tax policies | 5
Private business
Overview
Both parties are offering relief to businesses through the changes to the tax treatment of assets.
The Federal Government immediately expanded the threshold for the instant asset write-off to
$30,000 intended to improve cash flow for small and medium sized businesses, while boosting
spending and investment. Labor has proposed an investment guarantee policy aimed at assets
valued above $20,000.
Federal Budget
Policy: Expansion of instant asset write-off
Measure: Announced in the Federal Budget and passed through the Senate on 3
April 2019, the instant asset write-off is now extended to medium sized businesses
and the threshold increased from $25,000 to $30,000 per asset.
The new threshold will apply to small businesses with aggregated turnover of up
to $10 million from 2 April 2019 until the end of the measure on 30 June 2020. The
existing threshold of $25,000 continues to apply to assets that are first used, or
installed ready for use prior to 2 April 2019.
Medium businesses with turnover between $10 million and $50 million will gain
access to the instant asset write-off for assets up to the threshold of $30,000 that
are first used, or installed ready for use, from 2 April 2019 to 30 June 2020.
Policy: Amendments to Division 7A deferred
Measure: We reported in last year’s Budget update that a measure was
announced to clarify the operation of the Division 7A integrity rule with effect
from 1 July 2019.
Since then, the Government released a consultation paper seeking feedback from
stakeholders. The feedback highlighted that Division 7A is a complex area of the
tax law and raised implementation issues warranting further consideration.
On this basis, this year’s Budget announced that any amendments to Division 7A
will be deferred until 1 July 2020 to allow for further consultation and to refine the
Government’s approach to Division 7A.
Given the uncertainty around the potential changes to Division 7A (and the
fast approaching year-end), the deferral of the effective date of any changes is
welcomed.
“ Small businesses are the
engine-room of our economy
Federal Budget address
“
MinterEllison: Insights from the announced Government and Opposition tax policies | 6
Opposition Policies
Policy: Proposed changes to discretionary trusts Policy: Australian Investment Guarantee (AIG)
Measure: Labor has proposed a minimum 30% tax rate for Measure: Under Labor, the AIG will allow all businesses to
discretionary trust distributions to people over the age of 18. immediately deduct 20% of any new eligible assets worth
more than $20,000, with the balance depreciated in line with
Discretionary trusts generally allow for trust income to be the normal depreciation schedules from the first year. Eligible
distributed on an entirely discretionary basis to beneficiaries assets include tangible and intangible assets.
who maybe on differing tax rates (including less than 30%).
The AIG is proposed to apply from 1 July 2021.
Labor’s policy will only apply to discretionary trusts. Non-
discretionary trusts such as special disability trusts, deceased Policy: Tax transparency – changes to reporting
estates and fixed trusts will not be affected by the change. threshold
The policy will also not apply to farm trusts and charitable Measure: Labor proposes to lower the reporting threshold
trusts. for tax transparency data for private firms from $200 million
to $100 million. This is expected to lead to publicly released
The proposed change by Labor is to tackle the perceived use
data for another 600 large private groups. The publicly
of income splitting to minimise tax, which Labor assumes
released data includes disclosures of accounting income,
will make the tax system fairer and improve the Budget’s
taxable income and tax payable.
bottom line.
Policy: Tax transparency – changes to reporting threshold
The policy is proposed to apply from 1 July 2019.
Measure: Labor proposes to lower the reposting threshold
for tax transparency data for private firms from $200 million
to $100 million. This would publicly release data for another
600 large private firms. The publicly released data includes
disclosures of accounting income, taxable income and tax
payable.
MinterEllison insights
Labor’s policy to propose a minimum 30% tax rate for We also see the decrease in the threshold for the
discretionary trust distributions seeks to align with the reporting of tax transparency data for private groups
corporate tax rate of 30% (other than base rate entities leading to increased compliance costs for a large number
which are currently taxed at 27.5%). This is on the basis of private groups, adding a greater burden in an already
that those able to split their income through a family trust highly regulated corporate environment.
are typically carrying on some form of business that could
Clients that are now within the lower threshold for the
be equally carried on by a corporate. As a consequence
reporting of tax transparency data, should seek advice on
we anticipate that depending on the situation, there may
the impact on data that it now is required to disclose to
be a shift to transitioning what would otherwise be trust
the public and to manage compliance costs in respect of
structures, to companies (especially if potentially, the
the disclosure.
company is a base rate entity).
Clients currently operating their business through a
The AIG is Labor’s direct response to the Coalition’s instant
discretionary trust structure may need to revisit their
asset write off and seeks to encourage new investments.
overall operating structure.
Eligible assets would include machinery, plant and
equipment (but not buildings) and intangible investments Clients seeking to obtain the full benefit of the AIG will
such as patents and copyright. need to keep proper records to evidence the availability
of the AIG for investments in assets worth more than
$20,000.
“ We will provide an extra 20% tax break for every business that
invests in productivity-boosting equipment above $20,000 –
whether that’s a big manufacturer buying new technology, or
“
a tradie getting a new ute
Budget-in-reply address
MinterEllison: Insights from the announced Government and Opposition tax policies | 7
Global tax
Overview
Is Australia still an attractive place to do business?
The Government’s proposed changes see the introduction of a new tax treaty and the simplification
of complex integrity rules. Distinctively, the Opposition’s proposed policy considers changes to the
thin capitalisation regime, MEC groups and Country by Country (CbC) reporting. The question is
how foreign investors will view these policies?
Federal Budget
Policy: Australian Managed Policy: Tax Integrity – clarifying the • Allow the application of the
Investment Trusts (MITS) – Updated operation of the hybrid mismatch integrity rule where other
list of info exchange countries rules provisions have applied: The
Measure: The recently enacted integrity rules do not provide
Measure: The Government has
hybrid mismatch rules are a complex guidance on how they interact with
announced that they will update
set of integrity measures which other integrity provisions in the
the list of countries whose residents
contain several issues requiring Australian tax law. The announced
are able to access the reduced MIT
clarification which the Government amendment appears directed
withholding tax rate by adding the
has now attempted to address. Specific to clarifying that the integrity
following countries to the 114 other
details remain limited, however our measure will also apply even if other
jurisdictions on the list: Curacao,
observations are that the amendments measures also have application to
Lebanon, Nauru, Pakistan, Panama,
will: the relevant circumstances.
Peru, Qatar and the United Arab
Emirates. • Confirm that the rules will apply to It is proposed that the amendments
The updated list will be effective from 1 multiple entry consolidated (MEC) will apply to income years starting
January 2020. groups and trusts: The clarification on or after 1 January 2019. The
on how the hybrid mismatch rules amendments to the integrity measure
Policy: New Australia – Israel
will apply to MEC groups and trusts will apply to income years starting on
tax treaty
appear to be directed to ensuring or after 2 April 2019.
Measure: The Australia Israel tax that the Base Erosion and Profit
treaty (DTA) was signed on 28 March Shifting initiative implemented
“
2019. The DTA will enter into force, by the OECD (the initiative from
subject to the domestic requirements which the hybrid mismatch rules Our tax system
of each jurisdiction for the passage are derived) applies to all types of
of legislation. The DTA will enter into will remain highly
entities that comprise the Australian
“
effect on the next occurring 1 January tax system. progressive
for withholding taxes, 1 April for Fringe
Benefits Taxes, and 1 July for all other • Limit the meaning of foreign tax: Federal Budget address
taxes after the DTA enters into force. Currently the hybrid mismatch rules
do not provide a definition of the
The DTA adopts many of the measures
meaning of “foreign tax”, which
“
set out in the OECD’s Multilateral
creates uncertainty in determining
Convention to Implement Tax Treaty
Related Measures to prevent Base
the scope of these provisions when Reforming the tax
analysing foreign tax outcomes. It system so that it is fair
Erosion and Profit Shifting (MLI).
remains to be seen how this new
“
definition might operate.
for everyone
Budget-in-reply address
MinterEllison: Insights from the announced Government and Opposition tax policies | 8
Opposition Policies
Policy: Proposed changes to the thin capitalisation rules Policy: Proposed changed to Multiple Entry Consolidated
Measure: A thinly capitalised entity is one whose assets are Groups (MEC groups)
funded by a high level of debt and relatively little equity. Measure: MEC groups are corporate groups consisting of
Currently, the thin capitalisation provisions operate to deny Australian-resident entities that share a common ultimate
debt deductions for foreign controlled entities and Australian foreign owner, MEC groups are treated as a single tax payer
entities investing overseas, where the debt-to-equity ratio for Australian income tax purposes.
exceeds a certain limit. Currently, MEC groups are able to retain higher cost base
This limit is currently determined by the use of three tests; of assets. The result of this is there may be a reduction of a
future capital gain and the enhancement of depreciation
1. The safe harbour debt amount – Limits debt used
deductions, subject to the character of the asset.
to 60% of the difference between the value of its net
Australian assets and non-debt liabilities. Labor proposes to remove any systematic advantages
available to foreign-owned MEC groups through various
2. The arm’s length debt amount – Limits the amount amendments to the current tax act governing these
of debt used to an amount that one could reasonably provisions.
expect to borrow on an arm’s length basis from a third
Policy: Tax transparency – changes to CbC reporting
party.
Measure: Labor has proposed the public disclosure of CbC
3. The worldwide gearing amount – Limits the amount of reports lodged by multinational groups with global turnover
debt used at a gearing level consistent with the world of over $1 billion.
wide group.
Labor intends to amend the thin capitalisation rules to
remove the ‘safe harbour’ and ‘arm’s length’ tests for interest
deductions of multinational groups. This will leave the world-
wide gearing ratio as the only test to calculate the deduction
available.
It is yet to be confirmed when this measure will apply.
MinterEllison insights
Foreign investors should consider the current These structural amendments, along with increased
capitalisation of Australian operations in light of Labor’s transparency and ATO funding may mean that foreign
proposed amendments to Australia’s thin capitalisation investors will find themselves under potential scrutiny of
rules coupled with the (unspecified) reforms to the their arrangements in Australia.
taxation of MEC groups.
MinterEllison: Insights from the announced Government and Opposition tax policies | 9
“ Australians deserve to age with dignity
Federal Budget address
“
“ New measures to help boost the
“
superannuation of working women
Budget-in-reply address
Superannuation
Overview
No major changes were communicated by the Government with respect to the existing
superannuation system.
A number of policy changes were put forward by both parties to ensure that the superannuation
system operates fairly and with flexibility with respect to Australia’s ageing population.
Federal Budget Opposition Policies
Policy: Merging superannuation funds Policy: Superannuation for parental leave
Measure: Tax relief for merging superannuation funds to Measure: Labor proposes to extend superannuation
transfer revenue and capital losses to a new merged fund, contributions to parental leave payments.
and to defer tax consequences on gains and losses from
Labor has proposed that recipients of Commonwealth Paid
revenue and capital assets is now permanent.
Parental Leave and Dad and Partner Pay payments should
Policy: Superannuation contributions work test receive superannuation contributions. Labor’s policy is
Measure: The current work test is removed for those aged in response to the 40% gap in superannuation between
65 and 66. The current work test requires that people aged women and men on retirement.
over 65 work for a minimum of 40 hours over a 30 day Policy: Changes to superannuation payment thresholds
period in the financial year before they can make voluntary
Measure: Labor has proposed to phase out the $450
contributions to their superannuation account. The work test
minimum monthly income threshold for eligibility for the
will continue to apply to those aged over 66.
superannuation guarantee. This recognises that the income
Policy: Non-concessional superannuation contributions eligibility threshold disadvantages people who work park-
Measure: Individuals aged 65 or 66 will now be able to make time, casual and in multiple low paid jobs face.
up to three years of non-concessional contributions under
Labor has proposed to reduce the threshold by for the
the bring-forward rule. Those over the age of 66 are still
superannuation guarantee by $100 each year with the
unable to make such contributions.
reduction commencing in 1 July 2020 and with a view that
Policy: Spouse contributions age limit increase the threshold is reduced to zero from 1 July 2024.
Measure: The limit will be increased to 74 years.
Other changes:
Measure:
MinterEllison insights • Non-concessional cap to be reduced to $75,000 (currently
$100,000)
The superannuation changes announced by both
parties reflect their mutual intentions, to create fair • Income threshold for the extra 15% contributions tax for
access to superannuation for participants nearing high income earners to be lowered to $200,000 p.a.
retirement.
• Catch-up concessional contributions to be abolished.
MinterEllison: Insights from the announced Government and Opposition tax policies | 10What are the implications of the
proposed policies?
The implications will Tax reform is always a topical debate, For further information about the
encouraged to protect the prosperity of potential reforms, contact the
be quite different Australia by ensuring we are set up for MinterEllison tax team.
depending on which success, enabling our country to grow
in the short and long term. Amidst a
party is successful return to Budget surplus as announced,
in the upcoming a refreshed perspective on our current
tax system by both parties is welcomed
federal election. to ensure Australia remains competitive
in a global environment.
MinterEllison: Insights from the announced Government and Opposition tax policies | 11Contact us
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